Importance of Retirement Planning

It's important to review your retirement plan on occasion to account for changes in your income and expenses. (Image: Digital Vision./Digital Vision/Getty Images)

People are living longer, which means you may be spending more time in retirement than did members of previous generations. To ensure your retirement is a secure one, you will need to plan your finances. This will require you to consider such things as your life expectancy and your Social Security and pension benefits. Equally important is that you identify what being retired means to you in terms of lifestyle and the things you want to do, as well as the risks you want to avoid, such as outliving your financial resources.

Provide Retirement Income

Gayle Turim writes in "Everyday Health" that the odds are good that some people will live into their 80s or 90s. To ensure you aren't forced to make an abrupt change to your lifestyle at some point during your retirement years, review your future sources of income. Your retirement plan should include your Social Security benefits, retirement accounts and other assets that will provide you a secure monthly income in lieu of the salary you earn while working. Some of your assets, such as your Social Security benefit, might pay you a certain amount each month for life. Other assets, such as mutual fund shares, may pay investment income in the form of dividends, interest payments or capital gains that you will collect when you sell the asset.

Minimize Longevity Risk

According to the U.S. News and World Report article, "How to Calculate Your Retirement Number," you may be able to eliminate the risk you will outlive your assets if your retirement plan ensures you can replace 80 percent or more of your income during your retirement years. Robert Powell writes in a MarketWatch article, that you can counter longevity risk by accumulating assets that will pay a specified amount of income for life. Such assets include Social Security benefits, a pension and annuities, as well as a reverse mortgage, longevity insurance and a managed payout plan.

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Maintain Standard of Living

Retirement planning prepares a retiree for the life he'll live after his for-pay work ends. A critical part of retirement planning is determining the standard of living you would like to maintain when you no longer work, which is determined in part by how you will want to spend your time. You may support a part of your desired standard of living with a pension or government benefits. You also may need to be disciplined in your saving and investment in financial markets to build an investment portfolio that will yield the annual investment income you'll need to pay for your desired standard of living.

Determine Retirement Age

With careful planning, your retirement age can be a rational decision you make after considering various factors and taking the steps necessary to accumulate the assets that will support your decision. Robert Powell writes in "What's the Best Age to Retire," that you should consider not only the financial feasibility of retiring at a particular age, but also your ability to continue working and other personal issues. For example, think about at what point in time your retirement income will be sufficient to give you the lifestyle you desire and if you need additional paychecks to build your nest egg. This will be determined in part by such factors as your life expectancy, inflation, investment return or other risks, as well as the costs of health care and insurance.